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Identifying Systemic Risk

by Michael W. Stocker
Eyes On Wall Street |

On November 23, the Financial Stability Oversight Council voted to solicit public input in developing rules for designating financial market utilities as systemically important. A notice seeking comments will published in the Federal Register shortly, triggering a 30-day comment period.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act proposes to categorize the largest or most interconnected financial firms as systemically risky, requiring them to provide advance notice to regulators of any changes to their operations that would materially affect their level of risk, and subjecting them to additional risk management standards and examination and enforcement oversight.

While this goal seems clear-cut, the task of identifying systemically risky firms is proving to be a thorny problem. To begin the process of fleshing out the new rules, the FSOC is soliciting comments on the criteria that should be used to evaluate a financial market utility's level of systemic risk; how exposure to or interdependency with other financial firms or market utilities should be weighted; and how to measure the significance that a potential failure might have on the broader markets.